Question

Hoi Chong Transport, Ltd, operates a fleet of delivery trucks in Singapore. The company has determined that if a truck is driven 93,000 kilometers during a year, the average operating cost is 9.2 cents per kilometer. If a truck is driven only 62,000 kilometers during a year, the average operating cost increases to 9.9 cents per kilometer Required: 1. Using the high-low method, estimate the variable operating cost per kilometer and the annual fixed operating cost associated with the fleet of trucks. 2. Express the variable and fixed costs in the form Y a bx. 3. If a truck were driven 77,500 kilometers during a year, what total operating cost would you expect to be incurred?

Answer 1

The total cost when the truck is driven 93,000 kilometers = 93,000 * $9.2 = $855,600

The total cost when the truck is driven 62,000 kilometers = 62,000 * $9.9 = $613,800

1.

Variable cost per kilometer = (total costs at the highest activity level - total costs at the lowest activity level) / (highest activity level - lowest activity level)

= ($855,600 - $613,800) / (93,000 - 62,000)

= $241,800 / 31,000

= $7.8

Fixed operating cost = Total cost - Variable cost

= $855,600 - (93,000 * $7.8)

= $130,200

2.

Total cost = Fixed cost + Number of kilometers * Variable cost per kilometer

Total cost = $130,200 + Number of kilometers * $7.8

3.

Total cost = $130,200 + (77,500 * $7.8)

= $734,700